President Barack Obama returned to Washington facing an expected battle with
Republicans over the nation's 'fiscal cliff', as stock markets on Wall
Street tumbled on Wednesday.

The president faces an urgent challenge to prevent the gridlock that scarred his first term as fears grew that politicians will fail to cut a deal to stop the economy falling over a 'fiscal cliff'.

More than $600bn (£380bn) of tax rises and cuts in government spending are due in early January.

Failure to avoid the cliff will plunge the world's largest economy back into a slump and disrupt the global economy's still fragile global recovery.

Leaders in the Republican party wasted little time in ratcheting up the pressure on Mr Obama to rapidly agree a deal that limits the scale of the austerity poised to hit in a matter of weeks.

Speaker John Boehner, who leads the Republicans in the House of Representatives and has spent the last year duelling with the White House, said that both sides needed to work together to reach a compromise.

Although Mr Obama used his victory speech to supporters in Chicago to signal he will work with Republicans in Congress, the imminent threat from the fiscal cliff means that promise will be put to the test immediately.

Mitt Romney, the defeated Republican challenger, used his concession speech to urge "Democrats and Republicans in government at all levels to put the people before the politics".

"Do I expect peace to break out? No," said Bill Galston, a former adviser to Bill Clinton and a fellow of the Brookings Institute in Washington.

"Prolonged uncertainty over the fiscal cliff would be disastrous for national and global confidence, but I'm not sure how we avoid it."

As Washington yesterday digested the outcome of one of the most bitter presidential election campaigns in recent memory, concerns were building that America and the rest of the world will have an anxious wait for the resolution of the fiscal cliff.

Mr Boehner held a call with the Republican congressmen, and he faces a struggle to persuade them to sign up to a compromise that involves any tax increases.

Charles Schumer, a leading Democratic senator from New York, said that the message the American public sent at the polls was that "we need revenues, particularly on the higher income people".

The looming tax increases are happening because cuts in the rate Americans pay on personal income, capital gains and dividends all expire on December 31st.

Mr Obama has said he will not agree to anything that fails to lift taxes on those Americans earning more than $250,000.

The $110bn in cuts are the first batch of a $1.2 trillion retrenchment planned over the next decade, with half due coming from the Pentagon's budget.

One of Mr Romney's campaign promises was to increase defence spending, and Republicans in Congress are unlikely to accept major cuts to the military.

The urgency of the threat posed by the fiscal cliff was underlined as investors on Wall Street and in the City of London dumped shares within hours of the election results.

The FTSE 100 closed down 1.6pc at 5,791.63. Markets in New York recorded even steeper falls, with the Dow Jones Industrial Average plunging almost 300 points, or 2.2pc, to 12,941.90 during the day.

"It's so damaging for the economy to have this continuous uncertainty hanging over it," said Jens Nordvig, an analyst in New York at Nomura Securities.

The need to start negotiations comes as Mr Obama tries to reshuffle his top economic team.

Treasury Secretary Tim Geithner is leaving and experts warned that a replacement will need to be named quickly. Jack Lew, the current chief of Staff at the White House and a former Citigroup banker, and Erskine Bowles, a former senior adviser to Bill Clinton and co-author of a highly-regarded plan on how to cut America's debt, are the front-runners.

Mr Galston said that Mr Obama is going to have to be far more involved in the nitty gritty of the negotiations than he was during last summer's drama over the raising of America's debt ceiling.

The fiscal cliff is an early litmus test of Mr Obama's ability to both shepherd the economy and work with Republicans, two of the chief concerns of voters. A compromise agreement will signal that the White House and Congressional Republicans may be able to build on the accord next year by reaching a major long-term deal that cuts America's $16 trillion in debt.

Besides hitting the economy now, failure would raise the spectre that America and the rest of the world will be subject to four more years of deep divisions in Washington at a time the world can ill afford it.

As he looks out at his second term, Mr Obama also needs to break the gridlock on key domestic policy issues such as immigration reform and energy policy.

The ability to do so may also herald a greater consensus on foreign policy issues, where the White House and Republicans have clashed over how to handle Iran's nuclear threat, the uprising in Libya, China's growing economic muscle and what to do about the bloody civil war in Syria.